Rise of Chinese smartphones

The market for smartphones has grown extremely competitive as manufacturers vie for a share of hearts, minds and wallets of consumers. This was traditionally dominated by Apple and Samsung, but Chinese smartphones have grown significantly and commanded a substantial portion of the global market. 9 out of the top 12 smartphone makers are Chinese. They are driven by favourable policies of the Chinese government (tax breaks, relaxed labour and environmental standards) and are supported by a strong domestic market, these companies are presently stepping out of China and are set to capture the world smartphone market. 

Huawei is the world’s third largest smartphone manufacturer after Apple and Samsung. Although, Huawei originally made budget smartphones, it currently manufactures few of the unique phones and recently partnered with Google to produce Nexus 6P. Moreover, Xiaomi, OPPO and Vivo, all have emerged on the global map. These companies mostly sell off-contract smartphones that run on the android operating system, these are much cheaper from Apple or Samsung. The specifications, build quality and performance of these phones are extremely compelling apart from the low price, thus, they give a formidable competition to the established players. Furthermore, after capturing the domestic market these companies have made significant advances in neighbouring Asian countries and are looking to venture in the developed world. They may not be a threat to Apple, which holds a secure spot in the high-end segment. But, they do pose a threat to many other well-known smartphone manufacturers, including the powerhouse, Samsung. While Apple is not available in the $100 off-contract range, but Samsung introduced few entry-level phones. This was countered by Chinese vendors with top-end specifications and reduced prices to gain the market share.

Chinese smartphone manufacturers are at an advantage over their foreign counterparts since low-cost labour keeps the manufacturing cost down. But, the cost of labour is not the sole factor, smartphone producers in China do not pay the patent and intellectual property royalties. Every handset comes with scores of different IP royalties being paid to various companies for network, hardware and software functionality and these royalties add approximately $20 to $40 to the cost of a device on top of the cost of parts and assembly. Additionally, upstarts such as OnePlus and Xiaomi are much leaner due to the lowest channel costs as they sell directly to consumers.

However, these Chinese manufacturers operate on a razor thin margin. This is the reason, they want to capture the lucrative US market as the average device prices are much higher.

In addition, most Americans know little about the emerging Chinese smartphone manufacturers with Apple and Samsung having a combined market share of ~59%. Further, there are doubts and concerns regarding Chinese manufacturers and they may immediately face intellectual property lawsuits globally. However, Xiaomi's purchase of nearly 1,500 patents from Microsoft last year seemed to have quelled some worries. This provided courage to Chinese start-ups to move directly on Apple's home turf. While at this stage, many American customers may not identify a smartphone that is not Apple or at the very least Korean, the trend is irreversible for Chinese smartphones. Likewise, as television manufacturers Zenith, Motorola and RCA were eventually replaced by Japanese firms such as Sony, Sharp and Panasonic, it is expected that Chinese smartphone manufacturers too will overtake the US market.

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